A significant piece of regulation looms on the horizon. Unlike MiFID II, MAR will come into effect very soon and firms need to be prepared to meet its requirements. In this post, we outline what you should know about MAR and explain our approach for MAR compliance.
What is the purpose of the Market Abuse Regulation?
The Market Abuse Regulation (MAR) updates the regulatory regime for market abuse, establishing new offences and implementing easier enforcement. The Final Report, with technical advice on possible delegated acts concerning the Market Abuse Regulation, was published on 3 February 2015 (ESMA/2015/224), with the regulation coming into effect on July 2016 (except for the MiFID II-dependent provisions, which will come into effect on January 2018 pending final confirmation from ESMA).
The regulation describes activities that will constitute market manipulation and insider dealing (articles 12(1) and 8), providing illustrative behaviours considered market manipulation (article 12(2)). A list of indicators relating to false and misleading signals and price securing is presented in article 12(1)(a), and a list of indicators related to fictitious devices and other forms of deception is presented in article 12(1)(b).
The regulation also extends the scope of manipulation, or attempted manipulation, to include instances that may occur outside a trading venue and orders that may not be executed (article 2(3)). Manipulation related to the use of algorithmic trading and high-frequency trading is also given special consideration (article 12(2)(c)).
Key differences from Market Abuse Directive (MAD)
MAR covers a broader scope of venues and instrument than the original Market Abuse Directive (MAD). It includes activity on regulated markets, Multilateral Trade Facilities and Organized Trade Facilities. It applies to any related financial instrument traded over-the-counter which can have an effect on the underlying instrument, including spot commodity contracts (articles 12 and 15) and auction-based products based on emission allowances (articles 2(1) and (2), recital 10). It also covers the manipulation of benchmark calculations (articles 12(1)(d) and 2(2)(c)).
MAR also extends the scope to cover orders to trade in one product to affect price of a related instrument, including transactions in underlying instrument to influence price or value of derivatives (or vice versa), even if carried out on the same venue. It includes surveillance requirements across securities that are not necessarily explicitly related, such as the monitoring of trading across instruments that have an economic relationship with each other (and not just securities/assets and their derivatives).
The compliance process under MAR
The MAR compliance is best seen as a process comprised of four distinct phases: identification, mapping, monitoring and reporting.
Phase 1: Identification
This is where the key market abuse behaviours listed by ESMA as falling under the scope of MAR are identified. Not all behaviours are relevant to all firms, so it is important identify which market abuse behaviours are applicable for each firm.
A non-exhaustive list of manipulative behaviours includes:
• floor/ceiling price pattern
• ping orders
• abusive squeeze
• inter-trading venue manipulation
• cross-product manipulation
• painting the tape
• improper matched orders
• concealing ownership
• trash and cash
• quote stuffing
• momentum ignition
• layering and spoofing
• no intention of executing orders
• excessive bid/offer spread
• advancing the bid
• pump and dump
Phase 2: Mapping
This phase covers the effort to map the relevant behaviours identified in the previous phase to one or more alerts or reports, so that these behaviours can be monitored and reported if appropriate. The mapping exercise should aim to minimize the occurrence of “false positives”, i.e. the trigger of alerts where the market abuse behaviour was misidentified. Developing accurate alerts / reports to identify behaviours is key to the success of the next phase (monitoring).
Phase 3: Monitoring
This phase covers the monitoring of behaviours identified by the alerts/reports specified in the previous phase. Monitoring should be carried out on an ongoing basis, and properly documented to demonstrate a good level of due diligence. Within the overall market abuse surveillance process, monitoring provides important feedback with regard to how well the mapping of the alerts / reports was completed. It is the main source of feedback to enhance accuracy and reduce the risk of the whole process.
Phase 4: Reporting
This phase covers the reporting of instances where the behaviours monitored in the previous phase triggered an alert, with the corresponding generation of an audit trail that demonstrates the due diligence performed as part of a MAR compliance program.
When using the approach outlined above to comply with MAR, alerts and reports will provide valuable feedback to increase precision, reduce risk and lessen the occurrence of false positives (thereby enhancing the whole process).